LPs talk mid-market game, keep committing to big funds: survey

Nearly two-thirds, or 71 percent, of investors said they expected to target U.S. middle-market funds next year, while more than half, or 58 percent, said they would focus on European country-focused middle-market pools, the questionnaire said. Probitas defines the middle market as pools with $500 million to $2.5 billion in committed capital.

U.S. and European middle-market PE funds ranked first and second, respectively, Probitas said.

San Francisco-based Probitas questioned 90 institutional investors in September about their interests, opinions and perspectives on investing in PE to formulate the “Private Equity Institutional Investor Trends for 2015 Survey.” Most of the respondents were from pension plans, funds-of-funds, insurance companies and family offices. Less than half, or 42 percent, of respondents were from the United States, while 36 percent came from Western Europe.

The Probitas study allowed respondents to choose up to five PE sectors of interest. Less than half, or 40 percent, said they would target U.S. small-market buyouts (funds with $500 million or less), placing the sector in third place. Another 40 percent tapped growth funds, which ranked fourth on the list.

Mega buyouts, funds greater than $5 billion, ranked 17th on the list, despite raising plenty of capital. In October, Blackstone said it expects to begin raising its seventh global buyout fund, which is expected to seek $16 billion. Hellman & Friedman last month closed its eighth buyout fund on $10.9 billion, blowing away its $8.9 billion target in under a year.

Kelly DePonte, a Probitas managing director, said there is a disconnect between interest in mega funds and how much they actually raise. Investment staffs at institutional investors typically like middle-market buyouts because they can get better returns if they select correctly, he said. But such investors also have to put money to work. “What is at the top of the mind doesn’t necessarily reflect the size of the check they will write,” DePonte said.

While interest in the middle market remains strong, there is lots of fear. More than one-third, or 41 percent, of investors said purchase price multiples in the middle market were too high and threatened future returns. Another 43 percent fear the current PE market is at its peak. But only 6 percent said they were afraid another tech bubble is forming. (However, 34 percent of those who responded to the Probitas survey did not invest in technology, the study said.)

Thirty percent of investors said they would target U.S. venture capital in 2015, placing it 10th on the Probitas list. That’s up from 15th in 2014, the placement agent said. Increased IPO activity helped spur attention in VC, the survey said.

Much of the rebound is also due to North America investors, which ranked VC third in 2015, the study said. DePonte said VC interest is weak in Europe, while Asia tends to be focused more on growth. “I didn’t expect VC to rebound so quickly,” he said.